NOW Inc. (DNOW) CEO David Cherechinsky on Fourth Quarter 2021 Results

My name is Sheryl and I will be your operator today.At this point, all participants are in listen-only mode.Later, we will have a question and answer session [Notes to Operators].
I will now turn the call over to Brad Wise, VP of Digital Strategy and Investor Relations.Mr. Wise, you can start.
Thank you, Shirley.Good morning and welcome to NOW Inc.’s Fourth Quarter and Full Year 2021 Earnings Conference Call.Thank you for joining us and for your interest in NOW Inc.With me today are David Cherechinsky, President and Chief Executive Officer, and Mark Johnson, Senior Vice President and Chief Financial Officer.We operate primarily under the DistributionNOW and DNOW brands, and in our conversation this morning, you’ll hear us refer to DistributionNOW and DNOW, which are our NYSE tickers.
Please note that some of the statements we make during the conference call, including responses to your questions, may contain forecasts, forecasts and estimates, including but not limited to comments about our company’s business prospects.These are forward-looking statements within the meaning of the U.S. federal securities laws, based on limited information as of today, and are subject to change.They are subject to risks and uncertainties, and actual results may differ materially.No one should assume that these forward-looking statements will remain valid later in the quarter or later in the year.We undertake no obligation to publicly update or revise any forward-looking statement for any reason.In addition, this conference call contains time-sensitive information and reflects management’s best judgment at the time of the live conference call.Please refer to NOW Inc.’s most recent Forms 10-K and 10-Q now on file with the Securities and Exchange Commission for a more detailed discussion of the principal risk factors affecting our business.
Additional information and supplemental financial and operational information can be found in our earnings release or on our website at ir.dnow.com or in our filings with the SEC.To provide investors with additional information related to our performance as determined in accordance with U.S. GAAP, you will note that we also disclose various non-GAAP financial measures, including EBITDA, excluding other costs, sometimes referred to as EBITDA; Net income, excluding other costs; diluted earnings per share, excluding other costs.Each excludes the impact of certain other costs and is therefore not calculated in accordance with GAAP.To better align with management’s assessment of the company’s performance and to facilitate comparison of our performance with peer companies’ performance for the fourth quarter and full year ended December 31, 2021, EBITDA excluding other costs is not included. Includes non-cash stock-based compensation expense.Previous periods reported have been adjusted to conform to current period presentations.
Please see the reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure, as well as the supplemental information provided at the end of our earnings release.As of this morning, the Investor Relations section of our website includes a presentation covering our quarterly and full-year 2021 results and key takeaways.Today’s conference call will be replayed on the website for the next 30 days.We plan to file our third quarter 2021 Form 10-K today, which will also be available on our website.
Thanks, Brad, and good morning everyone.On our earnings call a year ago, as we recovered from a year in which the industry had endured the worst markets and conditions, DNOW responded quickly and decisively to defend its bottom line and set the stage for future prosperity. Base.We believe the market and our customer spending habits have fundamentally changed at the time, and decisive action is required to redefine our supplier, sales and customer engagement playbook, and to adjust our operating model to respond as the economy begins to recover. Flourish.Economic downturns inspire change, and I saw here this morning, amazed at DNOW’s talented, customer-focused women and men who not only embraced, but drove change.The results of our decisions over the past two years are evident not only in the day and night improvement in financial performance, but also in the competence, enthusiasm and ability of our team to deliver the exceptional solutions our customers crave in an environment of supply chain stress.
In the first quarter of this year, we began operations at our new Permian Supercenter in Odessa, Texas.This facility expands our position and investment in the heart of one of the busiest oil producing regions in the United States.It is a strong presence in our energy location and the complementary asset strength of Odessa Pumps, Flexible Flow, Power Services and TSNM Fiberglass, a strong and valuable customer appealing name that solidifies our brand in the Permian.During the quarter, we plan to open a new express center in the region to support our customers as their drilling program increases.This location will be primarily supported by the Supercenter as a means of regionalizing fulfillment and increasing efficiency and deepening intimacy with target customers.
Now, continuing our results, fourth quarter revenue was down 2% to $432 million at the end of the guidance we provided on our last call.Full-year 2021 revenue was $1.632 billion, an increase of $13 million or 0.8% in 2020 compared to the prior year, contributing to 2020 considering a strong pre-COVID performance of $604 million in 1Q20 37% of annual income, which is worth noting.In other words, for the nine months ended December 31, 2021, ignoring first-quarter revenue for each year was up $256 million, or 25%, from a year earlier.In 4Q21, gross margin expanded again to an all-time high of 23.4%, up 150bps sequentially.This is the fourth consecutive quarter of record gross margins and a record 21.9% increase in gross margins for the full year 2021.We are in an inflationary environment and we benefit from it.But this performance is the result of a careful selection process, and we have built relationships with reputable suppliers who make quality products and respect and reward reciprocity like we do.The more purchases we can pool and distribute to our supplier partners, the more we gain in product availability, return privileges and product cost, and our customers benefit from availability in a tight replenishment environment more.
And because we are selective about which product lines, businesses, locations and suppliers will support and customers will pursue.We are able to increase product line pricing across the overall mix of product margins because we favor more profitable products and either raise prices or pass on less profitable products.Now there are some comments on the area.For U.S. Energy, customer capital discipline remains a key driver of our performance as utility operators maintain production and return cash to shareholders.As we commented on previous calls, the behavior of public operators has encouraged private oil and gas producers to lead the rig count growth.During the quarter and throughout 2021, we continued to target and grow our share of private operators by supplying pipe valves and fittings for wellhead connections and tank battery facilities.Our integrated supply chain services customers continue to achieve mutual success as we provide additional value-added services to help our customers reduce lifting costs and achieve their production plans.For example, we have made progress on our rig material management program to support increased maintenance capital expenditure activities at several major E&P producers.
To drive growth through 2022, we secured several new PVF contracts during the quarter, including a large independent producer with assets in the Permian, and a direct-to-contract operation with the potential to scale up from the initial stage. Lithium Extraction Business Supply Agreement.In the Southeast, we received an order from an independent shelf producer in the Gulf of Mexico with producer flow to its pipeline assets damaged by Hurricane Ida August.We have also provided PVF for multiple compressor station repairs also attributed to hurricane damage.We experienced increased activity with an order from a large independent producer for three wellsite facilities in the gas-producing Haynesville area.Sequential midstream sales growth, we expect to see continued momentum as drilling and collection systems, increasing midstream takeaway capacity utilization, driving more investment in midstream maintenance and capex projects.Our midstream customer spending was more focused on natural gas and related produced water projects, which was a pivot in previous quarters.
In the plays of Marcellas, Utica and Haynesville, we have provided several gas producers with well-connected skid fabrication kits and transmitter receiver kits.We provide actuated valves for several NGL transmission line expansion projects where we provide technical support for product application and field service support for valve installation, testing, start-up and commissioning.We supply pipelines, actuation valves and fitting equipment to many natural gas utilities in the Midwest and Rocky Mountains.Turning to U.S. Process Solutions, we have observed that some of our customers have a preference for drilling and completions that have been minimizing the need for our rotating and fabrication equipment due to existing transfer and processing capabilities.However, we are starting to see an uptick in orders as customer joint programs move to areas with less existing infrastructure.Some notable projects achieved during the quarter included pump retrofits for some feedstock process and transfer applications at refineries in the Rocky Mountains, and we delivered a combination of high alloy isolation and control valves for our trona mine project in southwest Wyoming.
Activity in the Powder River Basin began to resume as we supplied a number of three-phase separators with valves and instrumentation to a large independent operator and a brine treatment package to another E&P operator.Demand for our instrument compressed air and dryer kits continues to remain high as operators replace pneumatic systems with compressed air systems to eliminate greenhouse gas emissions.In the Permian, we have supplied many pipe racks, pump skids to a large operator and separated us from our Tomball Texas manufacturing facility and received many orders for new heaters, processor vessels and separators.We have successfully expanded our hydraulic jet pup rentals, replacing ESP applications with increased performance on more flexible rental options as operators have embraced our solution.
In Canada, we saw significant wins during the quarter, with PVF orders from large Canadian oil sands producers, wellhead injection packages from Alberta producers in southeastern Saskatchewan, and for Artificial lift products for maintenance capex jobs in central Canada.We delivered several large orders for actuated valves through EPC for a privately held midstream operator in Alberta.Our international segment had the greatest impact on revenue due to supply chain delays and labor availability impacts.Activity is increasing for smaller projects, which should start to gain traction as more rig restarts take place in the Middle East.In addition, booking program activity has increased for many of the EPCs with which we regularly do business.Some notable wins this quarter include supplying a large number of gate valves, globe and check valves, power cables and fittings for cogeneration plants in the UK, power cables and fittings for upstream producers in Kazakhstan, and electrical power for operators Bolts in West Africa.
Also of note, we provided pipe fittings and plans for a project to NOC in Oman and a line of gate ball and check valves for a gas processing facility in Kurdistan.In our UAE operations, we provide actuation valves for methylene recovery units in Indian refineries and EPCs for triethylene glycol production projects in Pakistan.We also supply valves for IOC’s Iraq Produced Water Project and the EPC of the Jurassic Production Facility in Kuwait.Our industry has been dealing with product inflation and the impact on product availability caused by supply chain shortages and delays.Our supply chain team has been focused on minimising disruption by ensuring we have sufficient product to support our customers.We leverage our global spend with our suppliers to ensure that we can prioritize available volumes, while balancing risk and cost elements by combining domestic and import sources.Not only do you work hard to get assignments, we also provide suitable alternatives for customers who are increasingly relying on DNOW to find solutions that meet their requirements.This has resulted in some of our customers expanding their list of approved manufacturers using DNOW’s AML.We do have some pipeline inventory in transit and time to wait for final delivery, and we may experience some pipeline supply challenges in the first half of 2022.Seamless inflation continued as both domestic and import prices rose during the quarter.
Turn to our DigitalNOW program.Our digital revenue as a percentage of total SAP revenue was 42% for the quarter.We will continue to work with our digital integration clients to further enhance their e-commerce experience by optimizing their product catalogs and developing custom workflow solutions through our shop.dnow.com platform.We are leveraging and eSpec our digital product configurator for complex engineered equipment packages to advance our U.S. process solutions business.Over the past few quarters, this tool has helped many of our customers configure and eSpec air compressor and dryer packages to allow you to replace pneumatic systems in support of the operator’s need to reduce greenhouse gas emissions.Additionally, some of our client project teams use eSpec to help build and build project bids, while others use it to size initiator and receiver packages for quoting.Finally, we launched AccessNOW, a suite of automated inventory management and inventory control solutions for customers.Our AccessNOW products include cameras, sensors, smart locks, barcodes, RFID and automated data collection solutions that enable our customers to better manage and control their inventory without incurring the cost of a human inventory location.
Now, I would like to make some comments related to the energy transition.On the U.S. Gulf Coast, we provided duplex stainless steel venous pump kits for a biodiesel refinery that converts animal fats into biodiesel, and biopumps for an electric truck manufacturing plant in Texas.In Canada, we have won multiple orders for zero-emission actuation valves through EPC, carried out carbon capture and storage projects in Alberta, and drilled exploratory wells from producers to extract helium for high inspection industry end markets.These successes highlight how many of the existing products we offer are expanding into growth markets such as carbon capture and high-tech industrial manufacturing.We continue to monitor and track an increasing number of energy transition projects.Our business development team has been handling various RFIs and RFPs for many clients related to renewable diesel and gasoline, sustainable aviation fuels, direct air capture, carbon capture and storage, hydrogen and carbon dioxide transmission and storage projects.As we review bills and materials in our energy transition project list, we work with our manufacturing division to ensure access to a wider range of suitable products that will serve these expanding end markets.With that out of the way, let me turn it over to Mark.
Thank you Dave and good morning everyone.Fourth quarter 2021 revenue of $432 million was down 2% from the third quarter, primarily due to the normal seasonal decline impacted by the holidays and fewer workdays for which our guidance expected better.Fourth quarter 2021 U.S. revenue was $303 million, down $9 million or 3% from the third quarter.Our U.S. Energy Centers contributed approximately 79% of total U.S. revenue in the fourth quarter, which was down approximately 4% sequentially, and U.S. Process Solutions revenue increased 2% sequentially.
Transfer to Canada section.Canada’s fourth quarter 2021 revenue was $72 million, an increase of $4 million or 6% over the third quarter.Compared to the fourth quarter of 2020, revenue was up $24 million or 50% year over year.Canada’s strong fourth quarter was driven by improved demand in the Canadian energy market, as well as the value and distribution models that our customers are now seeing.A trusted and proven technology solution provider.International revenue was $57 million, down slightly sequentially and down $2 million or relatively flat compared to the third quarter, given the unfavorable impact of a weaker foreign currency relative to the U.S. dollar.International fourth-quarter revenue increased 21%, or $10 million, compared to the same period in 2020.Gross margin improved 150 basis points from the third quarter to 23.4%.The increase in gross margin came from several drivers during the quarter.Approximately one-third of the sequential gross margin basis point improvement or approximately $2 million was a tailwind due to approximately $1 million each in transportation costs and inventory expenses in the fourth quarter, both of which are expected to return to their average in the first quarter Level.We see our shipping costs return to a higher standard through 2022 and some of the profit tailwind is eroded as we move into 2022.
Another positive impact on margins in the fourth quarter was due to an increase in the level of supplier consideration, which we do not expect to repeat at the same level in the first quarter of 2022 as the threshold for purchase volume levels is reset.The final component of margin improvement came from the pricing of inflationary trends, especially linepipe and high steel content products, helping margins widen again this quarter.We continued to deliver margin growth, albeit to a lesser extent in most of our other product lines, as we selectively migrated to products and solutions that provide the greatest value to DNOW and our customers.Warehouse selling and administrative expenses increased $91 million in the quarter, up $5 million sequentially, due to strategic facilities, relocation and severance payments of $3 million, better-than-expected financial results and an increase in variable compensation due to COVID-19 early stop nearly $1 million U.S. dollar-related government subsidies, as well as our intentional investment in resources and people in a stressed labor market, to adapt DNOW to this growth cycle.As our fitness measures continue to bear fruit, we could see a similar reversal in WSA construction heading into the first quarter of 2022.
Since 2019, we’ve reduced our annual warehouse selling and administrative expenses by $200 million, so our team’s work to transform our enduring profitability model through cycles is paying off.Going forward, we expect WSA to decrease in the first quarter, close to our third quarter level, as we see these initiatives taking a foothold on a higher revenue base.Impairments and other charges disclosed in the income statement for the quarter were approximately $3 million.These are primarily related to the exit of the least and company-owned facilities during the period as we consolidated 15 facilities in the fourth quarter.GAAP net income for the fourth quarter was $12 million or $0.11 per share, and non-GAAP net income excluding other costs was $8 million or $0.07 per share.For the fourth quarter of 2021, non-GAAP EBITDA excluding other costs or EBITDA was $17 million or 3.9%.As Bullard pointed out, our reconciliation of current and future EBITDA adds to the non-cash stock-based compensation expense per period.Stock-based compensation expense of $2 million per quarter in 2021.We have been focused on continuously identifying and implementing initiatives to improve our operating model and increase our value to our customers.Today, our financial results show the hard work and commitment of our employees.I would like to highlight that our fourth quarter 2021 revenue of $432 million was 35% higher than the fourth quarter 2020, and EBITDA flow was 39%, or quarterly EBITDA $44 million year over year.These strong flows are a combination of our significantly improved inventory position, higher product margins and operational efficiencies, resulting in greater value for our customers and our bottom line.
When looking at full-year EBITDA, we shifted from a loss of $47 million in 2020 to a positive EBITDA of $45 million in 2021 or a trailing 12-month EBITDA improvement of $92 million with similar levels of revenue.Clear evidence of the tremendous effort and actions our employees take to achieve meaningful transformation in the company.I would like to thank our employees for the incredible feat that has put us well into this expected multi-year growth cycle.Another success in the fourth quarter that enhances our options for the future is our modification of our undrawn senior secured revolving credit facility, which is now extended through December 2026, and increases on our current net $313 million Provide ample liquidity on top of cash positions.Total debt remained at zero, including zero drawdowns during the quarter, and total liquidity was $561 million, including $313 million in cash on hand, and an additional $248 million in available credit facilities.Accounts receivable was $304 million, up 2% from the third quarter, inventory was $250 million, up $6 million from the third quarter, and quarterly inventory turns were 5.3 times.Accounts payable was $235 million, down 3% from the third quarter of 2021.
Working capital, excluding cash, as a percentage of fourth quarter annualized revenue was 11.6% as of December 31, 2021.We do expect this working capital ratio to increase a bit as we intend to drive growth through product availability to support our customers.2021 is our fourth consecutive year of positive free cash flow.Over the past four years, we’ve generated $480 million in free cash flow, which is notable.For 2021, a year of 35% revenue growth in the fourth quarter or $113 million in revenue growth compared to the fourth quarter of 2020, we actually generated $25 million in free cash flow in 2021, which is our usual A period of time that would consume cash at this level of growth.We remain committed to balance sheet management, investing in good inventory, pursuing strategic acquisitions and maximizing asset health to fuel the future.We again celebrate a successful quarter with optimism for the future, and we have the talent, resources and strength to grow our bottom line, grow a more agile business and create ongoing value for our customers and shareholders.
Thank you, Mark.Now, some of the comments on mergers and acquisitions, the top priority on capital allocation remains inorganic opportunities to increase profits.Through mergers and acquisitions, our goal is to strengthen and expand the business of products, geographies or solutions we offer our customers, and to enable these organizations to capitalize on market recovery and build earnings throughout the business cycle.We will continue to be actively involved in potential targets when evaluating opportunities in our strategic focus areas, particularly in process solutions and differentiated product lines, as well as industrial markets.For every transaction prospect, there are two parties involved.So, it takes time and skill to come to a conclusion that with oil prices in the $90s and a relatively strong general economy, seller expectations have increased, but we’re looking for durable and solid financial performance of the acquired company across the cycle.Not just when commodity prices are high.We are evaluating numerous opportunities in our pipeline, and we will continue to be selective and strategic as we pursue and ultimately cross the finish line.
Over the past six quarters, oil producers have struggled to reduce the global oil inventory glut, through a combination of North American E&P capital discipline and OPEC+ supply cuts.This behavior has resulted in higher commodity prices, improved balance sheets and better financial performance for most of our clients.As their financial situation improves, we expect additional capital expenditure investments to maintain and increase production, and as the number of customers increases, the increased activity will lead to increased demand for our PVF products and engineered equipment packages.I am optimistic that the current recovery and pace will continue to drive higher demand for our products and services while improving profitability.For our U.S. segment, I expect solid year-over-year growth as market fundamentals continue to improve.In Canada, we are well placed to use the continued recovery in commodity prices to provide incentives for producers to increase their budgets.
We also expect our Canadian business to grow year-over-year in 2022.We are seeing more activity in the energy sector fueling international projects.At the same time, due to the slower recovery of our international business, we are adjusting our footprint while ensuring uninterrupted service levels.We expect next year, 2022, to see growth in our international business.Despite the constrained logistics and product supply and a slow start to 2022 due to the COVID surge and weather-related issues in January, we believe that Q1 2022 revenue will rise sequentially in the mid-single-digit percentage range.WSA is likely to recover to 3Q21 levels in 1Q22, and we expect the near-term normalization of gross margins to be close to full-year 2021 levels of 21.9%.On a year-over-year basis, we expect revenue to grow in the mid-to-low percentage range in 2022.We expect full-year 2022 EBITDA revenue incremental to grow in the teen percent range, driven by continued market expansion, solid gross margins, similar to full-year 2021 percentage levels.While COVID, geopolitical issues and supply chain volatility have created a deeper scenario this year, we believe revenue growth will exceed $200 million and EBITDA in U.S. dollars could double in 2022.
Now, I’ll review where we are in the early stages of a long-term market expansion.A year ago, we expected full-year 2021 revenue to decline, given the strength of pre-pandemic revenue levels in Q1’20.Therefore, our focus is on developing a world-class sales force, developing our fulfillment model to improve product availability and customer service, and reducing cost per dollar of revenue and reducing inventory risk throughout the cycle.We strive to bias our efforts toward revenue growth to focus our valuable resources, allow customers to see value and significantly improve earnings and free cash flow.Looking back, from strong revenue growth to record gross margins, record inventory turns, record working capital turns, we have outperformed our expectations across all accounts and now we expect 2022 to be Entering the fifth consecutive year of positive free cash flow, we have historically struggled to do so in growth years.We are very proud to close the book in 2021 and we enter 2022.I’m proud that we have zero debt and ample total liquidity that provides strategic flexibility to fund organic growth and seize inorganic opportunities.I believe we will not face cash pressure due to debt service interest.I’m excited about the transformation of our operating model and how our hypercenter and regionalization plans will provide us with the opportunity to continue to improve our financial performance.
I am delighted with our organizational capabilities and how we are helping to address current supply chain challenges and bottlenecks our customers are experiencing.I’m excited about our ability to get products or alternatives.I’m very pleased with how our employees and customers understand the value we provide and it’s showing up on the gross margin line.I’m excited about our DEI efforts as we are on a journey of education and action on diversity and inclusion and how it will differentiate us as a company and as a competitor.I am proud of our leadership, training and development programs, and the opportunities for our employees to hone their skills.I am proud of our innovative partnerships with key companies, and we are seeking cutting-edge technologies from experts to integrate into our business.I’m proud that we have the best sales team and the most serious, tireless, customer-focused operations people in the industry.I’m glad our employees are getting bonuses and making DNOW a great place to work and thrive.
Finally, in addition to all the features, benefits and achievements, we have incredible momentum at DNOW.I want our employees and their families to know that we are moving from defensive, protective and hesitant to proactive, victorious, proud and excited.We are building for our future.I want to think in particular about our sales team and our people in the field and all those who are in front of our customers who go to great lengths every day to keep our customers happy and make DNOW the first choice for our customers looking for solutions and collective knowledge This will help us continue to win the market.Where are we, we are what we are because of you.With that out of the way, let’s open the call to the question.
This is Adam Farley from Nathan.The first is gross margin, inflation may peak in the first half of the year, does DNOW expect gross margin to peak over time with some pressure on gross margin, which is typically typical of slowing inflation?
Well, it depends on the relevant product line.We’ve probably had one of the most successful large product lines in terms of gross margin growth, despite our very broad price appreciation outside of the pipeline.Pipe is the pipe that we still maintain the price of seamless pipe, seamless pipe is the main pipe material we sell, and steel pipe may further experience after the first half of the year.But one of the problems I mentioned in my opening comment is that the timing of receiving the product is not entirely certain.So we can receive some products later this year, not just us, of course, but our competitors and our customers.That could widen the premium margins we expect to see on specific product lines.
We see broad-based inflation continuing.In your case, Adam, this may subside by mid-year.But with pipes in particular, I don’t know if that’s the case, and for many of the product lines we support, lead times are still long.So I think we’ve guided 2022 gross margin to a very high level, which is pretty much the same level as 2021, where we’ve seen four consecutive quarters of records.So it’s a matter of timing of receipt.It depends on how strong our market is and when the inflection point occurs.I mean, I talked earlier about a rather slow start to January, and I think things are going to get hotter here, which means more scarcity issues in the first half, possibly into the second half.
And then moving to exit the low-margin product line, we’re exiting the low-margin business at DNOW.Is there still a lot of work to be done, or is most of the heavy lifting done?
Well, we’re already down this road, I’ll say this.So for me, we have strong financial performance in our regions, regions due to rig movement, customer budgets, and customer consolidation, which all impact the success of location product line customers, etc. or the other way around, that’s always changing.For me, it’s a gardening job, making sure we’re focusing on the right things, making sure we’re putting our limited resources where we can make money for our shareholders, so we can prepare for the future and continue to grow the company.So I just think it’s an ongoing business reality that no matter what industry you’re in, you’re always going to need to fertilize and weed and replant and always position the business in the best position in the industry.
So it’s just an ongoing thing.In terms of major structural changes, I think we’re done.I think we’re out of cost reduction mode.We’re in what I call a fulfillment migration phase where we do want to regionalize most of our fulfillment to major opportunity centers, like standing in places like Williston, Houston, Odessa, and Casper.We want those to be high volume locations with trained personnel focused on one thing that takes care of customers, whether it’s a walk-in business, day-to-day business, large projects, speculation.We want to regionalize it.We want top talent to manage these supply chains, we want more variety of nodes or courier centers or small local locations that are closely related to customers.So I’m seeing this still happening, but it’s accelerating now and very excited about it.
Dave, I would like to start with the WSA, it sounds like the guidance for the first quarter is clear, probably in the range of the third quarter of last year.I was wondering if you could update our higher-level philosophy here, I think you said last quarter that for every dollar of revenue you were looking for incremental WSAs of $0.03 to $0.05.So if you could let us update this and give us any signal as to how that expense line might develop sequentially throughout the year?That would be helpful.
So I think on the last call, I said a couple of things, we still have a list of projects that we’re working on to make the business more efficient.I said we plan to reduce the WSA to the 12 to 15 range in 2022.As we’ve also said — I’ve also said that for every additional dollar of revenue above last year’s levels, we’re going to increase expenses by $0.03 to $0.05, offsetting those that we’re reducing.At the same time, especially in the past few months, I think it’s been over a hundred days since we’ve spoken to the public, and on the one hand, we’ve benefited a lot.I believe most of it is our nurturing strategy and focusing on the right things to increase pricing, which comes from product inflation, product scarcity, lack of availability.Of course, we have also experienced this in the labor market.So that’s a new attraction or retention cost tier that we’re experiencing in our 2022 guidance.But our philosophy is to significantly reduce WSA as a percentage of revenue and continue down the path of increased efficiency.
We may reduce WSA as a percentage of revenue by at least 200 basis points from 2021 to 2022.As I’ve said in several quarters, we’re in build mode.We are in growth mode.We’re prioritizing growth over cost containment, but we — as I said in response to the last question, we’re focused on changing our model, and we’re really making good progress on that path.So we did guide the price for the first quarter to around $86 million.It’s a little fuzzy going forward because we’re — although we have guidance on that, I think it’s pretty strict in our overall guidance on traffic and revenue and so on.But we will focus on having the best people in the industry.We focus on beating the competition.We are focused on growth.We’re focused on higher margins and nurturing new business, and it would cost more to skew those efforts toward higher margins.So this percentage is the percentage of revenue that will go down.We are working on projects to reduce the cost of doing business.But, like I said, we’re also on a firm footing this quarter.We are investing in new supercenters for the future to grow the business and that will offset the cost.But we understand how important Lean is, that it will help us in good times and bad, and we’re definitely going down that path.
Dave, like you followed up on the supercenter comment there.You’re in a growth market right now, and you’re pointing out that you’re going to get more and more influence in the WSA lineup because you’re investing there.So I’m curious as to the philosophy when you approve these investments, as you just called out at the supercenter, what conditions would you like to see to have the confidence to move forward and make incremental investments?
For example, the Permian Basin, for me, DNOW has a very strong doctor in the Permian Basin, not only from the standard branch business that we are developing, but like I said, from the flexible flow of the Odessa pump, TSNM Fiberglass and Power Services.We have a strong brand there, a very strong presence, and we think we have a real advantage.Now in the last quarter, which is the fourth quarter of 2021, we’re consolidating the 10 sites in the Permian into five, in one segment of the Permian.We think, we will have more inventory for our customers.We’ll be able to manage items from fewer locations, from people who transact a lot, we’ll have lower fees per dollar of revenue, we won’t have distributed inventory risk, which I call exponential inventory risk when you spread inventory across the network , you’ll have less inventory risk in the next downturn and you’ll have a more efficient business.So we’re growing in the Permian, we’re standing up, we’re growing in the Permian, we’ve just built a supercenter, but we’re consolidating, and we’re doing it smart.And we’ll be able to take better care of our customers and have more inventory with less inventory risk.This is an example of how we reduce costs, become better, and become stronger in the marketplace.
Dave hopes I’m not overly welcome here.But right at the point you brought up, so take the Permian as an example.If you – deduct everything you just described and the supercenter pro forma, is it fair to say that revenue per employee and revenue per square foot of roofline should be higher than before the recession, despite the fact that, Like you said you merged 10 to 5 branches?
I agree.Now, the roofline comment, I’m not sure.We may actually have more room today.So I’m not going to comment on that, but we should see improvement, really improved revenue per employee.Because I’m more interested in the bottom line impact of the investments we make or choose to give up than the top line.But generally, the top line should come soon, but I’m more interested in watching the bottom line.
So the first question is just back to the edge.The guidance seems to imply that you have a margin of up to 21x in the first quarter, and that’s what you’re aiming for to align this year with 2021.So I’m curious how you see the progress of the margins?Based on that prospect, it seems unremarkable.However, your HRC prices have fallen a lot since the September peak.I’m curious what you’re doing to offset some of the pipe bloat.And then when it correlates to 21.9%, I guess, as we go into 23 and 24, you think you can maintain that gross margin level for years.
I would.I mean, so 2021 is our best year for gross margins.Gross margins have improved sequentially each quarter.So while we’re looking to get to a 22% call in 2022, we’re a little cautious about over-guidance on gross margins because we’ve been so successful in 2021.On the issue of HRC prices, lower inflation, maybe subside in the middle of the year, I think there will be some offset later in the year in general, maybe even later in the year for the pipeline.But as far as maintaining it in the long term, I believe we can.That’s what I mean.We didn’t talk about it in the prepared comments, and we didn’t talk about it in the Q&A.But actually, in 2021, we exited the combined 15 locations primarily in the fourth quarter of 2021.Today, we have more than 125 fewer employees than we were at the end of 2020, in part because we gave up some low-margin businesses.We don’t see that we are trying to improve the efficiency of the company.Efforts for these people have not yielded some kind of profit.So we gave up about $30 million in business.That means, we let our people focus on higher-margin things.We didn’t let our people focus on low-margin stuff.We are able to generate better flow from activities in an environment that is difficult to achieve, we have to deal with labor inflation and process inflation.
So I think, it’s a problem — it’s not just the market that’s driving our gross margin performance.In fact, I worked a lot on this on the last call, and our product margins have improved year over year over the past five years.If that’s a problem for me, it’s to carefully cultivate what you wouldn’t do in the market to make sure you have the right people focused on the right things.So I do think those gross margins are sustainable.In terms of the flow of the year, I think we just have to look, I think is — if some of our higher-margin products are less available, then of course, we’re going to see a mix of issues that will drive down profit margin.But we’ve guided very strong gross margins.I do believe it’s sustainable and it comes from really focusing on what we as a company wouldn’t do.
A little toggle, I think is the most important thing.So you guide ’22 to earn as low as the teens.To me, this seems a bit conservative.I mean, the rig count is up 30% year over year, and the U.S. probably accounts for 70% of your business.So, based on that alone, you’re up 20%.Now, I know, there’s a bit of a mix of public and private clients happening, but you also said that Canadian and international should be up in 2022.Curious if you could help me see if the 2022 revenue outlook for the mobile segment in the region is going to be in the low teens?
So we’re based on what we’ve seen in the first 45 days of the quarter.We’re based on what we’ve seen in terms of product influx.We’re looking at some of our peers and how they see the market, based on what our clients are telling us.And we think it’s — I don’t think — we’re giving a range of loads and teens in terms of revenue.I think most things will happen — I think we’re going to see the strongest growth in the U.S., followed by Canada, and then more modest growth internationally.But if you look at rig counts and completions and some of the things we’ve traditionally focused on, customer budgets have been decoupled from those numbers for a few quarters now.We expect this to continue.So we’re guiding — we’ve done our best to achieve what we think is the growth.Like I said before, to see the gross margin growth that we’ve achieved and continue to cut the business and cut costs that don’t add value, we’ve come out of about $30 million in revenue. So that’s going to put us in 2022 Earned revenue is 2% or 3% higher, but we don’t benefit from the bottom line.So I think it’s a good range depending on how the years flow, so I think we’ll stick to that.I don’t think it’s conservative.I think it must be a very strong number.
The last one for me is that you expect to generate free cash in 2022.Do you think you can do better than 25 million in 2021?How does working cap consumption affect this outlook?
I think it’s in that range.I mean, there’s a wild card in the seating and timing of the inventory — that’s a single factor in what drives, whether it’s more or less than $25 million, but I think we can beat $25 million.We’re ahead of it in some cases, we’re a little behind in some cases, but we do plan to be well-positioned for growth in the coming months.
Thank you.Ladies and gentlemen, the time for the question and answer session is over.I will now turn the call over to CEO and President David Cherechinsky for closing remarks.


Post time: Jun-05-2022